RBS ready to sell $350m mortgage book

After almost two years in the market, the Australian arm of the Royal Bank of Scotland is finally set to offload a portfolio with about $350 million in reverse mortgages, with Challenger and
Macquarie Group
said to be frontrunners for the sale.

Reverse mortgages are “lifetime mortgages" extended to seniors which allow them to borrow money using the equity in their home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination.

RBS declined to comment on the deal.

It is understood the bank expected to have a result in a month. The average mortgage size is about $100,000, according to sources.

RBS had been trying to sell its book of reverse mortgages for almost two years, but had set a reserve price of about 90¢ in the dollar which was considered high by many in the market.

Another challenge for the sale has been finding stable funding for the deal. The nature of the reverse mortgage loans means that because the loans are only repaid or refinanced at the time of death or when the properties are sold, there is only one cash flow at the end.

“They are very long duration assets, so they are very hard to finance," a person familiar with the situation said.

However, the assets might suit a bank such as Macquarie – in search for yield, but with the necessary balance sheet needed to fund the loans – or others such as Challenger and life insurance companies, which have long-dated liability books to match the lifetime of the mortgages, and are also naturally exposed to mortality risk through life insurance policies.

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The book is part of RBS’s extensive book of non-core assets which the bank has been forced to offload since receiving £75 billion in government-backed funding in the aftermath of the global financial crisis. From a starting position of £258 billion in 2008, non-core assets have been reduced to about £72 billion ($113 billion).